Intro: Welcome to the Paragon Podcast. A podcast focusing on the needs of high net-worth individuals and their families. We discuss the markets, tax strategies, and how to better manage wealth with the goal of living better for today while planning for tomorrow.
Elean
Hi everyone, this is Elean Mendoza and I’m here with Evan Shorten the firm’s founder and principal.
Evan
Hi everyone, I hope you’re all doing well. I want to thank you for listening to the podcast and I encourage you subscribe if you have not done so already. You can subscribe to the podcast on the Apple podcast app or Stitcher Radio, or simply visit our website as we post all of our episodes there as well.
Elean
Today we’re going to talk about some of the myths and misconceptions regarding Social Security. If you go through all of our previous episodes, you’ll see this is a topic we cover often, and in fact, if you want to learn more about Social Security I encourage you to look through the blog on our website at paragonfinancialpartners.com/insights.
So with that said, let’s jump right in with the first myth. Social Security will cover all of your retirement expenses.
Evan
This is a Social Security myth that has existed for a long time and when you consider how many decades you contribute into social security, I can understand why some people believe it’s a type of retirement plan. While Social Security does provide you an important income stream, it actually provides much less than you would expect. Even from its original inception, social security was never meant to be the sole income source for retirees. Social security was created with the intention of being one leg of a three legged stool comprised of your social security benefits, retirement savings or pension, and your personal savings.
Elean
Ok now another myth or misconception about social security is that it only provides retirement benefits, but that’s not actually true.
Evan
No, it’s not. In fact the Social Security Administration also offers disability and survivor benefits, which are also known as widower benefits. Additionally, if you receive retirement and/or disability benefits, your individual family members may also be eligible to receive benefits as well. If you were to pass away while receiving social security benefits, your spouse, children, and dependents may be eligible to receive survivor benefits.
Elean
Ok. A third myth or misconception about social security is that it’s not taxable, and the reality is, it may or may not be taxable.
Evan
Correct, depending on your specific situation, social security benefits may or may not be taxable at the federal level. If you had earned income from a job or investment income, it’s possible you may have to pay income tax on a portion of your social security benefit. Additionally, there are 13 states who may collect income tax on your social security benefit depending on adjusted gross income and other state specific criteria.
Elean
And if you’re curios, those states are Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont, and West Virginia. You’ll have to look into your state’s specific social security laws or speak with your financial planner or accountant as the criteria does vary from state to state.
Now this myth that we just mentioned actually transitions into the next one quit well. Which is, If you earn income after you retire, you’ll lose your social security benefit.
Evan
Once you reach full retirement age, you can earn as much income as you want without affecting your Social Security benefit. However, if you elect to receive social security benefits and have not reached full retirement age, any earned income may affect your social security benefit amount in the following manner:
- If you have not reached full retirement, $1 in benefits will be withheld for every $2 you earn above the annual limit of $18,960 for the year of 2021.
- In the year you reach full retirement, $1 in benefits will be withheld for every $3 you earn above the annual limit of $50,520 in the year 2021.
Elean
Now when you say withheld, what do you mean by that? Is that money lost, is it deferred, is it penalized?
Evan
You don’t lose or forfeit the withheld amounts. Instead your Social Security benefit will be recalculated once you do reach the age of full retirement and you’ll receive a higher monthly benefit afterwards.
Elean
And just to reiterate a specific point. These withholdings only occur if you elected to receive social security before your full retirement age and either continued to work or decided to go back to work. Once you reach full retirement age, this no longer applies to you.
Ok, so moving on. This next one is probably the most talked about myth regarding social security, and that is – social security is bankrupt.
Evan
I agree, this one gets the most attention by far, fortunately social security is not actually going bankrupt. Social security is a “pay as you go” system, meaning today’s worker’s fund today’s retirees through the collection of payroll taxes, specifically FICA taxes. However, demographic changes in America are putting a major strain on social security. Better healthcare and longer life spans have resulted in an increasing number of people drawing social security benefits while birth rates have simultaneously declined.
Elean
In other words, a shrinking number of workers must fund a growing number of retirees.
Evan
Exactly. As this currently stand, it is estimated social security can continue to pay 100% of its scheduled benefits through 2034. If no action is taken by congress between now and 2034, social security would only be able to fund an estimated 77% of scheduled benefits. While that’s not exactly good news, it also illustrates two key facts:
- As long as there are workers in the economy, social security will continue to pay benefits, albeit a reduced amount; and
- Congress still has time to make changes in order to strengthen the program and address its projected shortfalls.
Elean
Ok, this last myth is a very surprising one to many people. In fact some of our clients have been surprised by this in the past well. That is, you can only receive social security benefits if you paid into the program.
Evan
Surprisingly that is not actually true. While it’s generally true that social security is an earned benefit where you must pay into the system for ten years to collect social security, it is possible in many cases to still qualify for benefits despite not having met the required work time.
If you paid at least some social security tax but not meet the 10 year requirement, it is still possible to qualify for some disability benefits depending on your age. Additionally, nonworking spouses, ex-spouses, children, or other dependents may be eligible to receive spousal, survivor, or children’s benefits based your earnings record.
Elean
Ok. Social security can be a highly complex subject with a lot of details and nuances – that’s why we wanted to keep this episode straight to the point on each of the myths and misconceptions we went over. If you have need help deciphering the puzzle that is social security please don’t hesitate to reach out to us.
With that, I hope you enjoyed this episode of the Paragon Podcast and that it helped give a little more insight into this topic.
Evan
And again, thank you listening. Please subscribe and don’t hesitate to reach out to us.
